Why and When to avoid Holding Inventories

Ran across this nice, succinct overview of why companies should implement Liquidation Sales Management Systems like B-Stock’s. Don’t telegraph underlying weakness or problems. Keep inventory clean all the time, not just after the all-too-common end of quarter fire drill.

Here is the text of the article:
Every business organization that is engaged in manufacturing, trading or dealing with salable products holds inventories in one form another. Inventory is held in the form of raw materials or in the form of salable goods. Since every unit of inventoried item has an economic value and is itemized in the books of account of the company, inventory can be considered to be an asset of the company.

Inventory Management is a critical function performed by planners to balance the inventory holding so as to ensure that optimum inventory levels are maintained. Any excess inventory will result in incremental costs of maintaining inventory and affects the financials of the company as it blocks working capital. Under inventory on the other hand can seriously hamper the market share. Any customer order that is not fulfilled due to a stock out is not at all a good sign. Therefore the responsibility of striking a fine balance in holding lean inventory calls for smart planning and continuous monitoring of the inventory levels coupled with quick decision-making.

Due to the above factors all organizations generally tend to avoid holding inventories except at certain times.

Inventory Buildup Can be a Sign of Hidden Problems
It has been noticed that inventory build up in process and manufacturing industries is often a sign of hidden problems, which lie underneath and are not visible at the surface level. In other words one can say that to cover up inefficiencies in the internal systems, people build up inventories as safety stocks.

Stock build up can occur as a solution to cover up supplier inefficiencies. If the vendors are not reliable and the flow of raw materials cannot be ensured, there results a trend to hold buffer inventories in the form of raw materials or semi manufactured Work in Process inventories.

In other cases inventory build up can happen due to bad quality. The inventory cost increase and resultant inventory storage cost can be attributed to cost of quality. If the production is not consistent with quality, the goods produced will get rejected leading to an increase in rejected inventory. Secondly, to make up for the loss due to quality rejection, one would have to increase production and hold finished goods inventory.

In other cases production delays can lead to build up of inventories too. Production delays can be attributed to varied reasons such as bad design of the product, production layout inefficiencies, production stoppage due to breakdowns, Lengthy process times etc. Besides these causes, there could be many other problems related to people and management resulting in slackness on the shop floor, which can add to inventory holding at various stages.

Such inventory build-ups not only block the working capital and increase un necessary cost of maintaining and storing the inventories, but also hide the problems which can cause serious threat to the business. Management should be watchful to identify any such inventory buildups and investigate into the root cause and solve such problems.

An inventory build up at the raw material side as well as the finished goods side gives cause for worry to the finance controllers. Any non moving inventory is a cause for concern because it not only blocks up the funds of the organization but the incremental cost of holding the inventory keeps increasing over a period of time and effect the bottom line figures.

More importantly inventory over a period of time is susceptible to loss, theft, pilferage and shrinkage. It can also become obsolete and deteriorate over a period of time if not used within the shelf life.

Hence inventory levels are always on the radar of not only finance controllers, but of the top management as well.

The original article can be found here.

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Furniture retailers should replace 35% of merchandise

I just read this article and was shocked (in a ‘wow, how could they let this happen’-way) by the analyst’s assertion that furniture retailers need to replace 35% of the inventory on their showroom floors to ‘freshen up’ the assortment. Companies need to get out in front of this sort of issue rather than react after it has become a problem? Wouldn’t they be happy today if they had built out an efficient liquidation channel that recovers 20%-50% more than old fashioned liquidation? Had they done so with a solution like ours they would have been moving smaller amounts of stale product over time and would have avoided a ‘35% issue’. Now they will be creating a glut in the market and be selling from a position of desperation/weakness. They are sure to get artificially depressed liquidation prices for this stale inventory.

Here is the text of the article:

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(Source: High Point Enterprise) by High Point Enterprise, N.C.

Apr. 19–HIGH POINT — There’s one factor that furniture industry veteran and analyst Jerry Epperson says should push buyers to purchase new inventory at the High Point Market — a buildup of stale inventory.

“The consumer has seen everything you have, and they’re tired of it,” he told a crowd of marketgoers at an educational seminar Sunday morning.

Epperson, a furniture industry analyst with Mann, Armistead & Epperson Ltd., publishes the monthly Furnishings Digest Newsletter out of Richmond, Va. He said at the seminar the state of the furniture industry was best determined by the performance of the mattress and bedding sector.

“The bedding sector is the purest indicator of the health of our business because there is no inventory cushion that you’ve got to work through like most furniture categories,” he said. “The good news is that in October of 2009, (bedding) showed a modest gain.”

While mattress sales were down 10 percent for 2009, the newsletter has documented percent gains in the sector every month since October. February saw a 12 percent gain.

“The mattress sector is the best indicator we have of what’s to come,” he said.

Given the somewhat good news, he said retailers should be ready to replace at least 35 percent of their merchandise, which will give consumers a reason to come back to their stores again.

Exhibitors at the High Point Market partially agreed with Epperson’s view but said they still sensed a hesitancy from buyers to place new, large orders.

“If the economy was vibrant, I think the answer would be yes, retailers would be ready,” said Simon Hilton, marketing manager with Fauld Town & Country Furniture. “I just don’t know that it’s there yet.”

Meredith Younger Spell, a spokesperson for Thomasville-based Younger Furniture, agreed with Epperson, adding that retailers needed new color and designs in stores to attract consumers.

“It’s not just that things have been getting stale,” she said. “I think retailers need more color. People have been telling us they need more color to bring change to their floors.”

Epperson also told retailers at the seminar that they needed to find a way to connect with Generation Y shoppers, those born between 1977 and 1994.

“That’s where the growth is going to be,” he said. “They (Generation Y) don’t have time to shop like baby boomers do. They’re only thinking about where they’re going to be in the next five years or so. You’ve got to find a way to reach them.”

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Major inventory issues at Palm

John Paczkowski at Daily Digital on Palm’s scary inventory situation. Such a shame to see this. I would love the chance to help them work through it.

“Big Problem for Palm: Growing Unsold Inventory” | John Paczkowski | Digital Daily | AllThingsD

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Carrying cost on excess inventory increases need for efficient disposition

I read a very good article on inventory management today called Aggregate Inventory Management. It was written by George Miller of PROACTION. I particularly liked his comprehensive description of “Carrying Cost” of inventory. Although we generally focus on, and pitch, the fact that we can help increase recovery rates, we really need to incorporate some of this into the ROI calculation of our solution. The most eye opening stat is that a typical carrying cost number is 25% of the inventoroy value. The can be very meaningful for large companies with substantial excess inventory sitting in the warehouse. Here is George’s overview of carrying cost.

Carrying cost

This refers to the cost of owning inventory. Let’s look at what goes into inventory “cost of ownership”, frequently called the “carrying cost” and expressed in terms of percent cost of inventory valuation per year of ownership. For example, a 25% carrying cost (typical) would indicate that it costs about $.25 to own each $1.00 of inventory each year. These costs consist of:

• Cost of money – The cost of capital to the company or, in some cases the “opportunity cost” or return that might be earned on the money by applying it productively elsewhere. The cost of money has ranged anywhere from 6% to 18% in the USA in the last 25 years. Obviously, this has a very significant impact on investment strategy.

• Obsolescence – The risk of inventory never being used, or needing rework to make it usable, needs to be factored into the cost of owning INVENTORY. In theory (and practice), the larger the inventory is, and the longer it is held, the more likely engineering changes, customer preferences and technological changes will render that inventory unusable. In the clothing industry, it is not uncommon to see inventories depreciate as much as 90% when styles change. Certain portions of the electronics industry have problems with inventory becoming obsolete very quickly, due to technological changes.

• Shrinkage – A portion of inventory becomes unavailable to the owner due to loss, damage, theft or spoilage. The longer inventory is there and the more there is, the more likely this is to happen. Steps to prevent it only raise carrying costs in other areas, such as security, climate control, better control systems, recruiting policies, etc.

• Quality Factors – Allowances for yield, attrition, scrap and rework. This is really more of a function of the process than the amount of inventory invested and is more related to throughput, but is sometimes included as part of the aggregate inventory carrying cost.

• Technological or Price Obsolescence – Prices don’t always go up. In fact, in industries such as electronics, prices often plummet due to constantly improving designs, product and process technology improvements. Therefore, it is desirable to minimize inventories in high-risk areas.

• Taxes – There are two dimensions to this: 1) in some areas, a tax is levied on inventories, so the more inventory, the more tax is paid. 2) inventory is regarded as an asset by most accounting and tax rules. Therefore, increasing inventories shows “profits” and profits are usually taxed, usually by multiple government entities.

• Insurance – The cost of carrying insurance on inventory needs to be considered, as well as insuring the space, equipment, people and other resources needed to control it.

• Space – Costly storage space sometimes occupies 25-30% of the total facility, when one considers raw material warehouses, stockrooms, work-in-process storage, receiving, shipping, outside warehouses, MRB and residual storage areas. Inventory reduction campaigns can help companies avoid the need to move to large facilities, or permit them to shut down or cut back existing facilities.

• Manpower – All of this inventory needs people to order, receive inspect, record, move, count, store, retrieve, post it to the ledger, etc. People are the largest or second largest expense (behind material) for most manufacturers.

• Record Keeping Systems – Software, procedures, equipment and paper must be used to track and control inventory.

• Material Handling/Storage Equipment – Conveyors, fork lifts, bar code readers, scales, automated storage and retrieval systems, trucks, carts, bins, racks, shelves must all be purchased, leased, maintained and cared for.

• Physical Inventories, Reconciliations – Must be conducted to ensure that inventories are properly accounted for and maintained.

• Transportation – Must be provided to move inventory in and out of the facility, to vendors, within the facility, to different workstations and storage areas.

• Energy – Heat, light, humidity control, air conditioning, refrigeration and fuel must be consumed to make all this happen.

• Inappropriate Lot Sizing – In inventory formulae, the carrying cost of inventory is often expressed as a flat percentage of the inventory value, for convenience of computations, but that is an oversimplification of reality. For instance, consider material handling/storage costs. Just because a dollar of inventory is added, doesn’t mean that carrying costs go up, say, $.02. In reality the costs would not usually go up in a direct proportion at all, but only when we had to pay for an additional expense, or make the next capital investment in equipment or space to accommodate the inventory. So actually, most of these costs are step functions, rather than continuous curves.

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Why liquidation of excess inventory is worth worrying about

I gave a talk in February at the Reverse Logistics Conference in Las Vegas about liquidation and why, for most companies, it is still being managed the same way it was decades ago. The main point I made was that companies don’t understand why they should allocate resources to improving this process. There are a couple reasons for this:

• Liquidation is viewed as a money-losing initiative. Most companies don’t even want to admit they have a need for liquidation, let alone invest money in improving it.
• If a company’s liquidation revenue represents 3% of sales, which is generally in the ballpark for large enterprises, a 20% to 40% increase in recovery rate only impacts revenue by a fraction of a percent. Not nearly enough to get management’s attention.

However, there is another way to look at this. Increasing recovery rate on liquidation is like raising price on a product. If you are selling an item this week for $100 and next week you find you can sell it for $120, that incremental $20 drops straight to your bottom line. There is no additional cost of goods, marketing expense or other overhead to accomplish this. This is exactly what is happening when you increase recovery rate on liquidation product.

Let’s run through some math. Let’s say you are a retailer with $100 million in revenue and $3 million of that comes from liquidation. Let’s also assume you are a relatively well run retailer and you have an operating earnings margin of 6%. If you were able to improve pricing on your liquidation sales by 20% (which is not an uncommon outcome for our clients), you would have made a 0.6% impact on the top line. Pretty insignificant. However, this $600k of price improvement is much more meaningful when compared to the company’s $6 million of operating profit. Now, all of a sudden, you have increased operating profit by 10%. Not bad.

The kicker here is when you consider what the company would have to do in terms of increasing sales of everyday ‘A’ stock product to have the same impact on operating profit. Ignoring that some overhead is fixed for simplicity, you can quickly calculate that the company would have to generate an incremental $10 million in top line sales to generate the same $600k in incremental operating profit. Furthermore, if I was generous in my assumption of a 6% operating margin and you have only a 5% margin, the sales required jumps to $12 million (or a 12% increase in overall sales)!

Think about the lengths your company goes to to achieve 12% revenue growth in a year!

Even if it took lots of money and hard work to achieve this 20% increase in recovery rates, I would argue it is just as worthwhile as a 12% increase in overall sales (maybe even more so because it improves your company’s margins, making your business stronger overall). The fact is, it does not take lots of money or effort to accomplish this. You can achieve this increase in recovery rates with almost no work at all! B-Stock Solutions provides all of the technology and services to manage this for our customers on a hosted SaaS basis. Call us and let us tell you how it works.

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National Semi profit, outlook beat forecasts

I was amused by this article. It starts with:

National Semiconductor Corp (NSM.N) posted results and a revenue outlook that beat estimates, as sales to industrial markets and improved corporate spending pushed margins to a record high.

It goes on in the second paragraph to talk about “increased demand across the board”. Then, in the same paragraph says:

…some analysts said concerns remained about a possible build-up of inventory as companies order too much in a recovering economy.

This is followed by a quote from Canaccord Adams analyst Robert Burleson.

The concerns I have are supply-chain related, and I think everybody has those. Are we over-shipping? Is there a buildup of inventory out there?

This just goes to show that inventory issues will always exist…in good times as well as bad. It reinforces my belief that all companies should establish an efficient solution for dealing with these issues so they aren’t playing catchup when the need inevitably arises.

http://bit.ly/bc6gry

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